Activity based costing and full cost absorption system
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Compare Activity based costing against the more traditional methods of management accounting such as the full cost absorption system.
Just looking for some direct comparisons between them. which is used more in the business world at the moment?© BrainMass Inc. brainmass.com March 6, 2023, 1:51 pm ad1c9bdddf
Here is some info on ABC and full cost absorption:
Activity-based costing was first clearly defined in 1987 by Robert Kaplan and Robin Cooper as a chapter in their book Accounting and Management: A Field Study Perspective (Harvard Business School Press 1987 ISBN: 0875841864). They initially focused on manufacturing industry where increasing technology and productivity improvements have reduced the relative proportion of the direct costs of labor and materials, but have increased relative proportion of indirect costs. For example increased automation has reduced labor, which is a direct cost, but has increased depreciation, which is an indirect cost.
Traditionally cost accountants had arbitrarily added a broad percentage onto the direct costs to allow for the indirect costs. However as the percentages of overhead costs had risen, this technique became increasing inaccurate because the indirect costs were not caused equally by all the products. For example one product might take more time in one expensive machine than another product, but since the amount of direct labor and materials might the same, the additional cost for the use of the machine would not be recognised when the same broad 'on-cost' percentage is added ...